How to Reduce Logistics Costs? Top 10 Ways to Reduce Logistics Costs in eCommerce in 2023
Running an eCommerce business efficiently is an arduous task. Managing eCommerce logistics along with constantly thinking of various ways to reduce logistics costs further adds to the woes of owners of operations of online businesses. Expenses line up for the owner even before they set up the website. Although a responsive website and preferred domain cost around a hundred dollars, the eCommerce business demands anywhere between $1000 – $10,000 for a small company and north of $50,000 for a medium-sized start-up.
Once up and running, the enterprise starts to demand cash inflow for various other activities like:
- Inventory: Things that an eCommerce business sells are the priority. Having good quality stuff to sell helps business owners make a brand name. Tying up with worthy sellers to procure the raw material or the finished good is critical for the business’s success.
- Operational Costs: These include costs like incorporation and registration of the company, any legal fees, trademarking the logo, or buying software for internal or customer use.
- Website Costs: From buying the preferred domain, building and running a website to maintaining a secure payment gateway comes under website costs. In fact, purchasing a server costs around $200, to begin with. Although purchasing an SSL certificate adds to the cost, custom designing and developing a website that runs on all digital platforms alike can cost anywhere above $10,000.
- Offline and Miscellaneous Costs: From buying an office space to running it, involves rent, infrastructure costs, internet costs, and other maintenance costs.
- Hiring and Retaining Staff: Having the right staff is critical for any business; a wrong hire costs around 30% of the employee’s first-year earnings to a company.
- Marketing Costs: Every business needs a good marketing strategy, more so if running an online store. Creating a logo, branding and ads, physical advertising copies, visiting cards for the employees, building and maintaining social media profiles, and sending customer updates via email marketing, all cost around 10% of the total expenditure as per Shopify.
- Logistics Costs: A majority of customers consider safe and timely shipping of their purchases as an essential criterion for rating a service. Everything boils down to nothing if the product they ordered arrives in pieces or is ruined. But logistics doesn’t only mean shipping the product from the warehouses to the customer. It embraces many layers that add to the eCommerce logistics costs.
Let’s take a look at how to reduce logistics costs for eCommerce business and proven ways to reduce logistics costs according to experts.
- What is eCommerce logistics?
- What are the Costs Associated with eCommerce logistics?
- Inventory Cost
- Storage Costs
- Packaging and Handling Charges
- Transportation Costs
- COD Charges
- Non-Delivery Reports
- Cost of Labour
- Reverse Logistics Costs
- What Factors can have an Impact on eCommerce Logistics Costs?
- 10 Efficient & Practical Ways to Reduce Logistic Costs for E-commerce in 2023
- Reduce Logistics Cost FAQs (Frequently Asked Questions)
What is eCommerce logistics?
Customers shopping in an online store add their liked items to the cart and head to the payment gateway. However, when they see the details like the expected delivery date or any additional costs associated with the logistics, they tend to abandon the cart midway. Similarly, if the returns take time to process, the customers tend to change their brand preferences.
Getting the purchase to the customer safely, timely, and in the most affordable way is what eCommerce Logistics embraces. This includes all logistical and supply chain management activities undertaken to run an online store.
eCommerce Logistics is the supply chain movement from the seller to the customer or back from the customer, in case of returns. Businesses running an online store sometimes tie up with logistics service providers to undertake all supply chain-related activities.
Here’s what an e-commerce logistics supply chain looks like –
Customers demand superfast deliveries and even agree to pay more to get them. India has moved on from one-day arrivals to receive their orders within 10 minutes of purchase for some items. With environmental enthusiasts calling for sustainable packaging solutions every day, the requirement for efficient and eco-friendly logistics has multiplied.
eCommerce logistics has scaled manifold in the past five years. It is expected to grow to ₹492.8 billion by 2025 at a CAGR of 23.6% since the escalating demand from tier 2, 3, and 4 cities is driving this progress.
WareIQ, an eCommerce fulfillment company, empowers online brands with a superior-tech platform to compete with Amazon like service levels by bringing their average delivery timelines from 5-10 days to 1-2 days.
What are the Costs Associated with eCommerce logistics?
An eCommerce business incurs many costs under the head of logistics alone (in simpler terms there are different types of logistics costs).
Managing inventory well requires a lot of planning, workforce, and money. Upstocking more than the demand can hog the company’s cash flow. Keeping less inventory can cause disruption in supply and meeting consumer expectations, thus causing considerable losses to the business.
Likewise, many mistakes increase the overall logistics cost for a company:
- Incorrect forecasting
- Sky-high production costs
- Reduced inventory turnover
- Unexpected overheads
- Failed or delayed deliveries
- Mistakes in data keeping
- Loss of customers
Inventory Costs are a function of the following:
Inventory Cover or Inventory Days or Days on Hand
It typically means, according to the rate of sale of a particular Stock Keeping Unit (SKU), how many days of inventory are we holding? (For example – I have 100 units of an electronics category SKU and my rate of sale is 20 units per day, my DOH or Days on hand inventory would be 5 days)
The higher my inventory cover, the higher is storage required. The higher the storage space required, the higher would be my warehousing rental space.
High Inventory DOH ↑ Higher Warehousing rental space & Cost↑
High SKU Spead ↑ Higher Warehousing rental space & Cost↑
Every inventory manager must continuously review inventory health and keep an eye on high-ageing inventory. There are multiple data cuts that one can look at in inventory.
1. Pareto of Inventory – 80-20 rule can be applied to look at inventory.
- Inventory Value (in Merchandise Value terms, used as GMV or Gross Merchandise Value in the E-commerce industry) contributes to 20% of sales.
- Inventory SKUs (count of stock keeping units) contributing to 20 % of sales
- Inventory basis ageing (Ageing of inventory means the amount of time the item has been in a warehouse since its first inbound)
Risk of damage, unsold, redundant inventory, expiry
Products with high shelf life do not have an issue with expiry, but a company dealing with perishable items (for example – grocery items, fresh category items, FMCG consumable or edible products) have a shelf life of 1 day to 1 year. A high inventory cover poses a risk of inventory getting stuck and potentially liquidated or written off.
Products like general merchandise, electronics, footwear, and apparel with high inventory pose a risk of being unsold and falling under slow-moving inventory. They further pose a risk of being liquidated at <30% of the original value of the item.
So how do we ensure low damages or losses, expiry or unsold inventory?
- Review of slow-moving inventory and continuous focus by selling it off before the item loses value in the market. Ensure its visibility to customers.
- Sales teams need to keep this a priority. If it is an e-commerce website, ensure the visibility of slow-moving items on the app. Pitch and do curated selling by checking past history of buyer purchasing
- Stack and store inventory by following storage norms to reduce damages.
- Packaging materials can be used to give protection to items.
- Stock verification teams need to check for damages and highlight to correct the inventory.
- If the company is capable of repackaging an item (with a packaging license available), the company must do so to avoid inventory damages
In short, inventory costs impact 2 aspects – warehousing space cost and losses/damages.
The company must work towards inventory points to ensure warehousing space cost is optimized and losses/damages are minimal. Losses/Damages/Liquidation in logistics typically range from 0.1% to 5% depending upon the type of product.
eCommerce companies need to store the inventory, the finished goods in high demand, and returned products. With crunched delivery timelines in the current times, they need multiple storage spaces or dark stores across the country to fulfill customer orders rapidly. All these efforts add to the overall logistical costs.
Storage costs can be broadly classified into:
Warehousing & Hub rentals
Having the right network design keeps warehousing and hub rentals very low. In the Indian context, rent per sq. ft is a metric most e-commerce companies track. It can vary from as low as 10 Rs/sq.ft to 100 Rs/sq.ft. Companies operating in hyperlocal space have to spend higher as they need to be closer to the demand with quick delivery turnaround timings.
Storage costs reduce non-linearly with the usage of shelving or racking. Depending on the type of products being sold, and the velocity or rate of sales, businesses can opt for multi-tier shelving type storage to reduce warehouse rental costs. There are multiple types of shelving and racking options right from long-span shelving to pallet racking which enables vertical storage possibilities with easy retrieval of inventory. The potential to store inventory in an sq. ft increases multifold with racking and shelving. But at the same time, some amount of material handling equipment would be needed for moving inventory which increases the CAPEX costs of the e-commerce company.
Operational costs such as electricity, repair & maintenance-related, stationery costs, and safety-related costs are part of storage costs. Such costs typically range from 5-10% of the facility or warehouse the company is operating
Packaging and Handling Charges
Different products need different packaging solutions. If the customers demand sustainable packaging, businesses need to procure specialised eco-friendly material to wrap the products with care. Moreover, fragile products demand extra care and time or temperature-sensitive commodities require expert infrastructure for transportation. Therefore, the company incurs many expenses to pack and handle its products effectively.
The expenses incurred in carrying the finished good to the customer or the returned product to the warehouse form 58% of the total logistical expenditure. If the inventory is not planned well, the transportation bears the burden of additional costs.
Transportation logistics costs can be broadly classified into –
- First Mile transportation
- Middle Mile Transportation
- Last Mile Transportation
- Returns and reverse pick-ups
Transportation costs are a function of –
- Load per trip or Utilization
- Distance of trip
- Type of vehicle used to transport
- Defined commercials for trip
- Delivery window to customer
- Type of product being transported
- Number of drop points
|Transportation||Utilization||Distance (in Kms)||Metric||% Cost of Transportation||Time Window||No. of Drop Points||Type of Vehicle||Tonnage (in Tonnes)|
|First Mile||~100%||50-1000||Cost/Kg, Cost%/GMV||20%||4-5 Days||1||Big - 20 Ft, 32 Ft||10-30|
|Middle Mile||80-100%||50-1000||Cost/Kg, Cost%/GMV||25%||1-2 Days||1-5||Medium - 20 Ft, 32 Ft, 15 Ft||5-20|
|Last Mile||70-100%||0-100||Cost/Kg, Cost%/GMV, Cost/Drop Point||75%||8-10 Hours||1-50||Small||0.5-5|
|Reverse Pick Ups||<50%||0-100||Cost/Kg, Cost%/GMV, Cost/Pick Up||1%||8-10 Hours||-||Small||0.5-5|
Related Article: How to Reduce Transportation Costs?
Due to convenience, around 80% of Indian customers opt for cash on delivery. The delivery partners eCommerce companies hire for the job charge extra for COD for the payment collection from the customer and submitting the proof of delivery to the company. Moreover, the logistics provider incurs additional charges if the product needs to be returned to the warehouse, thus passing on the cost to the eCommerce enterprise.
Failed deliveries cost a lot to the logistics service provider. If not managed well, they can disrupt the supply chain. Every undelivered product needs to be traced back to the eCommerce company. If the reason behind the unsuccessful delivery is not uncovered, the other attempts might fail too.
Cost of Labour
The supply chain survives through the presence of good employees. They are needed at every step, whether it is packaging, warehousing, transporting, or finding the way to the customer’s house for drop-off. Therefore, finding the right hire is critical for eCommerce companies to continue to exist, and they add to the overall logistics cost borne by them.
Reverse Logistics Costs
The charges are incurred when a customer opts to return the product to the seller. In such a scenario, the eCommerce company incurs costs for picking up the product from the customer’s place, transporting it to the warehouse, and inspecting and repackaging it for resale or recycling.
Although insurance matters less to most eCommerce companies, the product’s security being transported to or from the customer’s place holds utmost significance. The company doesn’t insure a product if it is of less value, but that doesn’t take away the need for top security measures to be in place and for readiness in case of unforeseen contingencies. Having insurance is a great way to lure more customers as it ensures the safety of their order. Many logistics service providers offer to insure their deliveries, and eCommerce companies negotiate the rates with them.
The unavoidable devils of expenses and taxes form a crucial component of the logistics costs. The introduction of GST in 2017 condensed multiple taxes into one, but it still consumes a significant share of revenue earned by eCommerce Logistics companies.
A variety of factors influences all expenses. Let’s understand what those factors are for the logistics costs.
What Factors can have an Impact on eCommerce Logistics Costs?
Like the others, eCommerce businesses take customer expectations and feedback very seriously. To address the growing consumer demand for shorter delivery timelines, even eCommerce startups invest heavily in dark stores and multiple warehouses across the nation, thus increasing logistics costs. They bring down product rates to lure more hits to the website as the quality goes up irrespective of the price tag.
AI and Machine Learning have entered the supply chain and are revolutionizing how eCommerce warehousing and distribution work. eCommerce companies are using superior software to drive the supply chain.
Information is key in the logistics business, and improved online supply chain platforms assist logistics managers in carrying out tasks related to inventory, warehousing, transportation, and order management quickly. Having a solid tech backbone enables better information processing and, thus, better decision-making. Decision Support Systems (DSS) also give businesses the desired competitive edge.
A country’s financial performance and regulatory framework influence eCommerce and the supply chain industry. When GST was introduced in 2017, it changed how taxes worked in India, especially in the supply chain industry. When the distribution had halted except for essential goods during the pandemic, the eCommerce industry was among the worst affected. The businesses couldn’t deliver despite the demand, and the industry faced losses more than ever before.
Logistics is a critical industry that influences global trade. It generates employment, income, and infrastructure and invites foreign investment. However, a vicious cycle of influence runs between the industry and the economy. One cannot function while the other suffers.
The Emergence of Global Brands
The entry of Amazon changed the face of eCommerce in India. Such global brands with deep pockets pushed the Indian eCommerce players to think creatively to secure their share in the vast market of Indian consumers. Soon, the war was not limited to mere price tags. It also spread to product quality, delivery timelines, and returns policies.
Everything combined, the Indian eCommerce logistics has borne the brunt of escalating costs and consumer demands due to intense competition in the sector.
It is not just pizza that gets delayed in a hailstorm. eCommerce suffers as an industry due to poor weather, which directly affects the physical movement of goods. The weather seems to be a prominent factor that impacts the speed of this industry. However, climate change isn’t far behind.
Climate change has been causing severe disruptions globally, and eCommerce is well aware of the indirect costs it is bound to bring. The above simple example of a failed delivery snowballs into reverse logistics costs, unmet customer expectations, wastage of perishable produce, expenditure on fuel and person-hours, and the resulting monetary loss.
Fluctuations in fuel prices trigger a chain reaction in logistical costs. All modes of transportation run on fuel, and steady fuel prices mean cheaper transportation costs. In case of an upsurge, even if the eCommerce company tries to save costs in other areas, it boils down to nothing as the fuel price hike burns down the additional savings.
Weight and dimensions play a significant role in eCommerce logistics costs. The heavier or bigger the package, the higher the transportation cost. Moreover, some odd-sized packages require specialised transport, which demands more money.
eCommerce companies employ various hacks to save costs here. Using fitted packaging or intelligent ways of wrapping help save costs associated with weight and dimensions.
As mentioned earlier, the international giants introduced tighter delivery timelines in the country, which fueled the competition in the eCommerce industry and pampered the customer’s imagination. While most players now have similar deadlines, they endure steep expenditures due to strict targets.
From public holiday extras to the cost of reaching a difficult-to-access destination, surcharges vary in range but add to the overall cost of eCommerce Logistics.
With so many ingredients escalating the final number and a multitude of factors affecting the eCommerce logistics cost, it becomes imperative for corporates to adopt ways to reduce it. But how can eCommerce companies reduce logistics costs?
Here are ten sure-shot hacks to reduce logistics costs and achieve them efficiently.
10 Efficient & Practical Ways to Reduce Logistic Costs for E-commerce in 2023
Here are 10 Proven Tips by experts for year 2023 to reduce logistics costs/ reduce transportation logistics costs for your online business;
Partner with a 3PL Provider
Sometimes, a business needs another pair of hands to delegate tasks and ease their workload and get an expert or a different opinion on managing work. That is why many eCommerce businesses outsource logistics to a third party that is an expert in customised supply chain solutions and can help them reduce logistics costs.
These 3PL fulfillment service providers are professionals who can analyse and suggest ways to cut costs and still meet customer expectations. For instance, they can recommend the best means to widen the customer reach and shorten delivery timelines. Their services range from warehouse management, inventory management, transportation and distribution, technology solutions, and reverse logistics. However, the most critical service they provide is delivery, as it deals with the end consumer.
Keeping storage spaces closer to customer hubs where a business receives most orders is a foolproof trick to improve delivery timelines and save costs. But not every business can afford to open a dark store or a storage center in various parts of the country. Buying or renting such spaces burns a hole in the logistical pockets of eCommerce companies. Logistics partners like WareIQ assist eCommerce companies to reduce logistics costs and ward off logistical nightmares by providing storage spaces closer to customers across the country.
But before signing up with a 3PL partner, eCommerce companies should ensure their end goals and vision sync with the logistics provider. They should be able to customise services per the company’s requirement and provide specialised handling services for fragile, delicate, perishable, and time-sensitive orders. But most importantly, they should give a bouquet of delivery options to ensure order fulfillment in case of contingencies. Read the blog on best 3pl for small businesses to understand factors online businesses should consider before choosing a 3PL
Collect Data Extensively
All good decisions have one thing in common. Availability of data in abundance. eCommerce players survive and grow on data collected from their customers, sellers, logistical partners, delivery personnel, suppliers, government, and other players in the industry. eCommerce companies need to know every pinhole that might be leaking revenue out of their systems.
But that’s not it. The data collected needs to be analysed well to churn out information that decision-makers can use. Good technology helps a lot in analysing and processing data. This is a proven way to work on ways to reduce logistics costs.
Employ Extensive Tech
To reduce logistics costs, a company needs to automate warehousing, transportation, and distribution. Many eCommerce companies looking for hi-tech solutions employ Warehouse Management Systems (WMS), shipping aggregators, or delivery tracking apps to manage operations. Some even use automatic container loading systems in their storage spaces to save staffing and time and prevent damage to the goods.
But the world has moved past these tools. Instead, AI and ML have changed how technology operates and adapts to businesses. For example, WareIQ offers a comprehensive, streamlined platform to keep a tab on warehousing, and delivery and drive customer engagement. These tools also help eCommerce players collect, store and analyze data and have been proved by experts to reduce logistics costs.
Locate Suppliers Closer to Customers
A business’ preferred supplier in Cochin could make it difficult to transport products to its distribution center in the East or most customers in the tier-3 town next to Patna. To reduce logistics costs and save time, the company must find sellers close by. A good seller next door is better than the best associate a thousand miles away.
Businesses must look out for consolidation opportunities for their shipments to a single location or team up with other shippers to increase and fully utilize their truckload. Both these techniques help reduce logistics costs for them and save time.
While consolidating their shipments, companies must use industrial-grade floor weighing very accurate scales. Reduced weight discrepancies lead to lower logistics costs hence help to reduce logistics costs. Moreover, rethinking and optimising their delivery routes is essential while combining shipments to a location to reduce transportation costs.
Optimise Storage/ Reduce Warehousing Rental Cost
Warehousing consumes a significant chunk of a company’s revenue and contributes around 10% to the total logistics costs incurred by corporates. ECommerce companies must optimise storage capacity by collecting in-depth data and adapting superior technology and out-of-the-box techniques. eCommerce companies need to analyse their storage, inventory, and order management systems to ensure no resource goes waste. They should minimise spaces and increase density for good optimisation to reduce overall costs of the supply chain, hence helping in reducing logistics costs.
Another trick is to reduce the inventory for items that don’t sell much or categorise items based on their rate of return. This way, companies can save time and space.
The Supply Chain Planning team needs to build projections of sales basis on which warehousing rental space needs to be triggered keeping in mind at least 90% utilization of rental space. Any underutilization will lead to high fixed costs. The team scouting for warehousing space needs to ensure low Rs/Sq Ft
Buy Packaging in Bulk
A simple yet effective technique. Businesses should buy packaging material in bulk to save money and time. They could strike a deal with their preferred supplier for a regular supply of the wrapping ingredients in bulk. If the company is into eco-biodegradable packaging, purchasing in bulk can help reduce logistics costs.
Define the KPIs
A business cannot improve what it cannot measure, in order to reduce logistics costs one should define its KPIs. The extensive data collection techniques don’t serve any purpose if the companies don’t have performance indexes to measure them against. Therefore, all eCommerce companies must define their key performance indicators to measure their performance regularly. Beginning from delivery success rates to return rates and the level of inventory wastage, everything needs to be appraised.
Ascertain All Costs
Every business incurs some fixed and variable costs. Companies need to keep a tab on and strive to reduce individual expenses. For instance, preventive maintenance is a fixed cost but an indispensable expense, but varying shipping costs can be trimmed and we can reduce logistics costs through various tricks discussed above.
Reduce Cart Abandonment
Cart abandonment proves that the customers like what you are selling but not the overall proposition. In most cases, the biggest reason occurs to be the figure flashing on the checkout page. Other reasons are the delivery timelines or simply the additional shipping charges. Either way, it costs the company a customer as that buyer is unlikely to return to shop at this portal.
ECommerce businesses need to reduce their cart abandonment rates. A trick to do this is placing a minimum order quantity for purchase to get free or faster delivery.
MOQs increase revenue, which helps in managing logistics costs. Companies can keep a minimum order quantity while ordering pushes the users to add maybe one more item to get quicker or free delivery. As a result, they receive what they like, and the business gets closer to its profit margin besides being able to reduce the abandonment rates for shopping carts.
eCommerce companies face a cash crunch due to intense competition for prices and services and the flaws in the country’s logistics infrastructure. Since logistics plays the most significant role in their success story, they must scout for solutions to reduce logistics costs. The right tools and significant associations make the uphill task i.e to reduce eCommerce logistics costs easier. Managing logistics in-house while focusing on the reduction of logistics costs is a difficult task for online businesses. Hence, it’s advisable to outsource logistics to the best fulfillment services partner like WareIQ.
Established in 2019, WareIQ, a Y-combinator-backed startup, has rapidly grown to be the leading provider of full-stack eCommerce fulfillment services for some of the most reputed brands in India. WareIQ offers a full-stack platform for eCommerce companies to enable same-day delivery and next day delivery to customers – an Amazon Prime-like experience but accessible to everyone.
WareIQ’s fulfillment platform optimises delivery speed, reduce logistics costs & customer experience through the 4 steps mentioned below:
- Sellers send their stocks to WareIQ’s Regional Distribution or fulfillment centers
- WareIQ Intelligently places inventory across its network of 20+ FCs
- WareIQ picks, packs & ships orders across the online/offline channels
- WareIQ’s Recommendation engine to choose from a wide network of courier service partners and prioritize shipping speed and logistics cost, with access to WareIQ Rush for same-day delivery
- Pan India Fulfillment & Darkstore Network: Plug-and-play fulfillment infrastructure with no minimums, which is compliant with Amazon Seller Flex, Flipkart Assured, Myntra and other marketplaces
- Inventory & Network Planning Excellence: Best-in-class AI models for sales forecasting, product segmentation, and inventory management to reduce inventory by 40% and increase revenue by 10%.
- Vertically Integrated Fulfillment Tech Stack: Our Fulfillment Tech Solution supports integrations with 20+ top marketplaces & D2C platforms, and prominent national, regional and hyperlocal couriers, enhancing reach by covering deliveries for 27,000+ pin codes
- Supply Chain Productivity Applications: Integrate a host of supply chain productivity apps with a single-click to your existing CRMs, ERPs & accounting software to manage your logistics workflows from one command center. Use Apps like RTO Shield to get 100% RTO protection, Branded Tracking to turn your order tracking page into a profitable marketing channel, and many more.
Trusted by 300+ top Indian brands, we are helping them accelerate online sales and expedite their growth through a synergistic combination of advanced technology, robust fulfillment infrastructure & seller enablement services!WareIQ is backed by leading global investors including Y Combinator, Funders Club, Flexport, Pioneer Fund, Soma Capital, and Emles Venture Partner.